RXO forecasts 2025 freight recovery despite current challenges

With the first quarter of 2025. Winding down, how is the freight market shaping up?

You're watching CCJs 10 44, a weekly episode that brings you the latest trucking industry news and updates from the editors of CCJ. Don't forget to subscribe and hit the bell for notification so you'll never miss an installment of 10 44. Hey everybody, welcome back. I'm Jason Cannon and my co-host is Matt Cole. There's been talk about a freight recovery in the market for a while now, but the industry has yet to see that materialize

Speaker 1:

According to the latest curved truckload market forecast report from RXO for Q1, there have been signs of improvement in the truckload market since midyear 2024, despite companies in the market not really feeling that improvement. Before we look ahead to the rest of 2025, here's what RXO observed coming into the year in the spot and contract markets.

Speaker 3:

So we use the RXO curve as a proprietary index to measure what's happening with spot rates in the market. So this is proprietary data RXO data only and what we do is we measure the year over year percent change delta for transactional rates in the environment. So what we saw towards the end of 2024 was an expansion of a year over year increase. So we actually officially went inflationary on the curve around Q2, beginning of Q3 of last year and we saw that start to expand towards the back half of the year. So we were expecting that with seasonality and some bit of dislocation in the market, considering what we know has happened on the supply side, we actually ended the year up about 11.5% for the Q4 average of 2024 versus the Q4 average of 2023. So again, it's a year over year percent change delta.

So what I will say, what's important about that again is that it is line haul only. So we use line haul. We think that it gives us a pretty good perspective of what's happening for the healthiness of carriers overall, considering that's where a majority of the expenses. So it gives us a better idea of operating costs, how much is potentially falling to the bottom line for the carrier base in the industry. But it is important to note that fuel was down year over year as well. In Q4 it was down I think about an average of 8%. So when you talk about from an all in perspective on spot rates, it's not that drastic, not about 11.5% increase in the line haul component, but again, affirming up of rates on the spot side. And then what's important about that and what we've learned is that the spot really drives contract behavior.

So we really have a strong indication that shows once we see behavior on the spot side, we start to see the contract environment react about two to maybe three quarters later. So when we saw that happen in Q2 of last year and then start that climb inflationary for spot rates towards the end of Q4, we started to see contract rates behave a little bit differently. So in Q2 that's when they were bottoming out. They were down around three to three and a half percent year over year in Q2 and then we ended the year in Q4 about one and a half percent down. So still deflationary, right? Still a difficult environment for carriers in the contract space, but we started to see that climb back towards equilibrium as spot was outpacing contract on a year over year basis. Now again, that's important for us. It doesn't mean that spot was moving at a premium, it just means the year over year percent change was accelerating faster.

Speaker 2:

Corey says Q1 has looked about the same as Q4 and he expects that to be the overall trend when the quarter's over.

Speaker 3:

So we saw all that play out towards the end of Q4 and we've seen that pretty much stay consistent into Q1. We're predicting that we end Q1 about the same levels from a spot percentage change year over year, about 12% or so from a line haul perspective. And then we've actually seen contract rates go inflationary using the cast line haul index as a proxy. We really liked that proxy to what's happening in the contract environment. The January print was actually inflationary for the first time in almost two and a half years. We think that again, that behavior when spot starts to surpass contract on the curve line, we start to see it behave and we actually saw it behave. Now it's a moderate increase year over year, certainly as it's a difficult environment, but nonetheless an inflationary print for the first time in quite a long time.

Speaker 1:

RX O'S curve report highlights some key economic indicators that the company is watching to help determine when the trucking market is going to flip back positive for carriers.

Speaker 3:

I think the two biggest macro economic indicators are certainly manufacturing and consumer spending. So we've seen some green shoots on the manufacturing side. When you look at the ISM manufacturing report, January was the first report that was showing growth and not contracting for almost 26 months. So when you start to see that it's a pretty good sign of things starting to at least kind of firm up, right? We're not declining anymore, things are moving in a better direction than they were before and the same thing with February. It was down a little bit month over month, but we are still seeing it in growth territory, which is not like we've been in the last 26 months or so. So that's a good indication of us kind of firming up in a perspective for demand. The other important indicator that we like to look at from a macro lens is consumer spending.

That's going to drive everything in our industry and we have seen, again, there are challenges across consumer spending in the country, but we are starting to see again, green shoots there and particularly the good side the goods is what kind of drives trucking demand versus the services of PCE and the consumer in the industry. If you look at kind of the five-year pattern of PCE goods makes up on average about 32% of overall consumption and we've started to see that metric kind of bottom out and firm up. We're climbing back towards that five-year average and if we can see a move and it doesn't have to be a big move, we can start to see some goods and driving overall demand and consumption into the industry, which I think is an important metric there that we want to call out. When you talk about the freight industry in specific supply, that's really important for us as well from an economic indicator of what's going on and we've seen supply continue to exit the market.

I think it's about 26 out of the last 28 months supply has been exiting the market from an mc authority level, right from authorities leaving the market. But what we've seen is that the pace at which supply seems to be leaving the market is starting to slow now it's still exits, it's still a very challenging environment, but when we start to see that slow, it gives us an idea that supply and demand are coming back more into balance. We're getting more towards a state of equilibrium. So I think that's a key metric for supply within the industry that we're keeping our eye on.

Speaker 2:

Beyond the uncertainty of tariffs, which we've covered previously on the 10 44, Cory explains what other economic trends are XO is watching that could impact the freight market.

Speaker 3:

I think there's two really big trends that we continue to watch and particularly when I say those trends are what I look for, rate volatility in the market, right? The curve is really important to us as we measure volatility and what I think carriers and procurement specialists that are out there in the industry want to understand rate volatility in the market. So there's two metrics that we're watching very closely and I think are really important for people to understand. One being the spot to contract either discount or premium. Okay, so earlier we said in the curve, spot rates look on a year over year basis look higher, but that just means the rate of change is accelerating faster on spot versus contract. It actually doesn't mean that spot rates are moving at a premium to contract in the market. When we see that right now we're moving at a discount, right?

Spots are moving at a discount in order to see some real rate volatility in this market. That metric has to change spot needs to start moving at a premium to contract and then we start to see routing guide deterioration. That's when procurement professionals are going to spot more often than they are. You're searching for a truck. It most likely means that this market has finally gotten to a point where demand is outpacing supply and rates are out there in the spot market that are more advantageous for the carriers than at the contract market. So that's a really important metric that we look at and helps us also think about what the future might bring from rate volatility. So we got there actually SPOT was moving at a premium to contract in our network. The way that we measure at the four higher level for about a 10 week span between the beginning of December and or sorry, about middle of November to the end of January, we got some dislocation in January from weather.

That was the first time. If you go back and you look over the last two to two and a half years spot had only been moving at a premium to contract in two instances over the last two and a half years. It was July 4th, 2024 and Christmas of 2023. There's only two times over the last two and a half years. So when we start to see that metric change that's important to us, it says okay, this market's getting a little bit closer to balance and it is susceptible to some volatility. Now we have seen rates kind of moderate over the quarter and spot is back to moving at a discount to contract in the industry. So if we start to see that firm up, if we start to see some demand tailwinds going into Q2 and we see some acceleration in that metric, it's really important to what we think about for rate volatility moving forward.

Speaker 1:

Corey says RXO is also watching how much volume is going to private fleets instead of for higher carriers.

Speaker 3:

The other metric that we really like to watch and I think has been, we've been on this metric for a while and I think it's really important for the industry as a whole is the different in volume in the overall market, in the overall industry and how much of that volume is going to the private fleet market versus to the four hire market. And I don't think a lot of people are talking about this as much, and I think we've been on it for the last couple of quarters, but volume in the industry has stayed relatively consistent over the last year and a half or so. Again, we talked about that the consumer is relatively resilient overall, but what we've seen is the volume to the private fleet network has expanded over the last year and a half and I think as shippers went through the challenges of covid and thinking about going to the four hire market and playing the spot market, there was a strategy to kind of shift and grow private fleets in the industry and then of course that volume doesn't make it to the four higher market.

So that metric, the dislocation, a little bit of the volume that's going to the fleets versus the volume that's going to the four higher market. It was about as wide as it has been in a long time back in Q1 and Q2 of last year, and we started to see that gap close towards the beginning, or sorry, towards the end of 2024. And we've stayed relatively stable over this last kind of two and a half months, the beginning of 2025. But until we start to see the four higher demand come back a little bit and that gap start to close, I don't think you're going to start to see a lot of rate volatility in the near term. So that's just a really important metric into what's happening in the supply side in the industry and key for what we think about rate volatility in the short and long term.

Speaker 2:

It's important for fleets to temper their expectations for when the market does flip because the rate environment from 2020 and 2021 is really unlikely to return.

Speaker 3:

The thought of rates getting back to covid levels is probably not going to happen given some of the demand headwinds that we're seeing and we continue to see, and unless that changes in an unforeseen matter, I don't see rate volatility going as kind of crazy as it did in cycle five, that covid period, at least for how we've been measuring on the curve. But I think the expectations are as long as supply is continuing to exit, you're going to get an imbalance and this market's going to be susceptible to some of those changes. We look at tender rejection rates towards the back half of the year. Last year they were at two and a half year highs. I think you can get back to that even without some crazy spike in demand like covid, right? We talked about PCE, just some nominal changes in the goods consumption in the US can throw this thing into a forward-looking pattern that drives rates higher.

So when we look at the previous, we've been measuring this back to 2006, the previous four cycles before covid, you can think about spot rates normally kind of peaking in that 25 to 30% range year over year. So can we get back to a level that's equivalent or close to that on average? I think we can now how soon that recovery happens, that remains to be seen, right? Whether it's a V-shape recovery and we really start to see some acceleration telling or using what history's told us, we can get back, I think on average around 25 to 30% up in line haul spot rates. Just when that happens, I think it remains to be seen again, is it the back half of this year? Is it into 2026 given some demand components? But yeah, definitely curbing expectations against what happened in Covid, right? The peak of covid was north of 65%. I don't think we're going to see anything like that in the next cycle given what we're up against.

Speaker 1:

Looking ahead through the rest of 2025. Cory explains what RXO expects to see in the freight market the rest of the year.

Speaker 3:

I think it's building on what we already kind of said. We have conviction that the bottom of this cycle is in, and it's been in since probably the middle-ish part of last year, and we remain and have an outlook that contract rates can be up low to mid single digits year over year this year. Certainly driven by some of the spot behavior and how susceptible the market might be during some of those seasonality trends like a July 4th where we get some dislocation peak season in the back half of the year. So one thing that I think is important, and another metric that we've been watching is kind of the seasonality of what Q1 brings, right? People that have been in this industry for a long time know that Q1 is usually one of the softer quarters from a demand standpoint. You're coming off of the peak season, the holiday shipping seasons in Q4, and you really do start to see the market moderate into Q1.

What I think's important about this year is that the moderation and the seasonality of this market is in line with expectations for what we're seeing, and particularly in line or even slightly better than it was last year. So the peak of the holiday shipping period back down to the Q1 lull, if you will, we're not outpacing that. So it's not like market rates are driving down faster and further than they were this time of the year. So again, that kind of gives us conviction that the baseline's been reset and were reset slightly higher than we were last year to the tune of those kind of in the contract side, low to mid single digits as they reset this quarter and into Q2 and then the volatility for spot in the back half of the year. Again, I really got to see that spot to contract ratio change and that metric changes. Once we do see that change and it's sustained, we really start to see about four to six months later that volatility really enters the market and things are kind of off to the races. So we're not there yet. Can we get there maybe in Q2, and that leads us to some higher spot rates in the back half of the year. I think it's certainly possible given that the market's closer to equilibrium and a little bit more susceptible dislocation. Like we said.

Speaker 2:

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The RXO Curve offers a forecast for the freight market

RXO shares their latest truckload market forecast and insights on freight rates